Suntec – CIMB

The signs of strength

SUN kept its DPU unchanged yoy at 2.2 cts (25% of our full-year forecast) in 1Q14 despite strong revenue growth of 32.8% yoy. The strong growth, which was in line with our estimate, came mainly from the opening of Suntec Singapore following the completion of Phase 1 of the AEI. We stress that the DPU being paid comes entirely from organic contribution, i.e. there is no dipping into the capital pool. We maintain our Add rating with an unchanged

DDM-based (discount rate: 8.0%) target price of S$1.83 on the back of further income contribution from the upcoming Phase 2 of AEI at Suntec City.

Phase 2 of Suntec AEI

Phase 2 of the AEI (scheduled to open before the end of 2Q14) registered a strong 95.0% pre-committed occupancy as at 31 March though we speculate that it is closer to full occupancy at the moment. During the results briefing, management indicated that the AEI remains on track for a 10.1% ROI, securing an average rental rate of S$12.69 psf/mth for Phases 1 and 2. Based on our calculations, this translates into an average passing rent of c.S$12.15 psf/mth for Phase 2, a level which we deem fair given that the majority of Phase 2 tenants are non-fashion tenants who usually pay lower rental rates.

No financing requirements until 2016

In terms of its financing needs, SUN has fully refinanced all the debts in FY14 and FY15 via a recently secured S$800m, 5-year loan facility together with the proceeds from the recent S$350m placement. With no further risks in financing, together with a low all-in financing cost of 2.49% and 65% of total debt subject to a fixed rate, we believe that SUN is well-shielded from any upcoming hike in interest rates. Furthermore, barring any future potential acquisitions, we believe that capital raising is unlikely.

Maintain Add on bright prospects

Looking ahead, Phase 2 AEI will begin to contribute in 3Q14. Marketing for Phase 3 (scheduled to complete in 4Q14) has also commenced and, based on our background checks, is relatively well received by potential tenants. In addition, with further room for positive rental reversion in its office portfolio, coupled with the commencement of coupon payment from Leighton Tower, we maintain an Add rating with an unchanged target price of S$1.83.